Understanding SOFR conventions in a floating-rate real estate loan

A loan priced at “SOFR plus a spread” is not fully described until the agreement identifies the SOFR rate, observation date, reset method, floor and day count. Those details determine payments and whether a hedge offsets the intended exposure. For institutional multifamily debt, small convention differences can produce meaningful cash differences.

Prepare a convention record from the executed agreement, note and hedge confirmation. It should allow someone independent of the transaction to reproduce a payment. A market-rate screenshot cannot replace the contractual calculation because it may display a different SOFR measure or observation date.

Identify which SOFR the loan uses

The New York Fed describes SOFR as a broad measure of overnight Treasury-secured financing costs.^[1] That overnight rate differs from its published compounded SOFR Averages and from a forward-looking Term SOFR rate. The common name does not make these measures interchangeable.

The New York Fed's 30-, 90- and 180-calendar-day SOFR Averages use historical observations and specified compounding rules.^[1] A 30-day average is not a projection of the coming month and is not simply the average of whatever daily rates appear on a spreadsheet. Identify the published rate and date actually required by the loan.

The ARRC's 2021 business-loan conventions distinguish SOFR Averages selected in advance from Term SOFR and separately discuss in-arrears conventions.^[2] These are voluntary recommendations. The signed agreement can choose different permissible details, so read it rather than assume the recommendation is binding.

Separate observation period from payment period

A 30-day historical averaging window can determine a rate used for an interest period with a different number of calendar days. A monthly payment does not imply a fixed 30-day accrual or a rate recomputed from the current month's daily observations.

The ARRC explicitly notes that an averaging observation period and interest period need not have the same length.^[2] It recommends particular lookback and business-day approaches, but the owner's calculation should use the actual agreed calendar, fixing date and holiday treatment.

Freddie's April 2026 floating-rate sheet specifies 30-day Average SOFR as its pricing index and actual/360 accrual.^[3] A January 2023 SEC-filed building loan uses its own benchmark and payment provisions.^[4] Named program terms and historical negotiated contracts demonstrate why a generic “SOFR loan” label is inadequate.

Reproduce one payment before underwriting a forecast

Consider an original hypothetical $90 million interest-only balance, a 2.25% spread and a 31-day interest period on actual/360. Assume the contractual fixing is 4.10% Term SOFR. Interest is $90 million multiplied by 6.35% multiplied by 31/360, or $492,125.

Suppose a comparison loan instead uses an assumed published 30-day Average SOFR fixing of 3.85% with the same spread, balance and day count. Interest is $472,750. The $19,375 difference arises from the assumed benchmark fixings; it does not establish that one rate convention is always cheaper.

Neither illustrative rate is a current market quote. They are distinct assumed inputs for showing the calculation. A forecast should use scenarios appropriate to the contractual benchmark, with the calculation date and source recorded. Avoid substituting an overnight rate forecast directly into a term or averaged-rate payment model without explaining the approximation.

Apply the floor in its agreed location

Suppose the same hypothetical loan has a 3% benchmark floor and the fixing falls to 2%. With the 2.25% spread, the contractual rate is 5.25% if the agreement applies the floor to the benchmark before adding spread. The 31-day interest payment is $406,875.

Ignoring the floor would produce 4.25% and $329,375, understating the payment by $77,500. Some agreements define floors or adjustments differently; reproduce the actual formula. Do not assume the floor applies to the all-in coupon or disappears because the loan is hedged.

The ARRC recommends applying a floor to the benchmark for new loans, while separately discussing legacy fallback adjustments.^[2] That distinction is useful when reviewing documents, but the borrower must verify the signed terms. A legacy spread adjustment is not necessarily the lender's credit spread or a new-loan requirement.

Translate quoted rates into calendar cash

Under the hypothetical constant 6.35% all-in rate and $90 million balance, 360 days of interest is $5.715 million. A 365-day span on actual/360 produces $5.794375 million, approximately $79,375 more. This is a day-count effect, not an additional stated coupon.

The New York Fed explains actual-calendar-day calculations with a 360-day denominator in its SOFR averaging methodology.^[1] The loan's accrual and hedge's accrual still need separate confirmation. An annual rate multiplied by principal can be a useful shorthand, but should not replace the calendar cash schedule used for reserves or debt service.

Check start and end dates, inclusion or exclusion of payment dates, stub periods and whether a nonbusiness-day payment adjustment changes accrual. A model with the correct rate but the wrong number of days can misstate the payment. Ask the servicer to reconcile the first actual statement with the convention record. Maintain a fixing log showing the contractual observation date, published input, any adjustment, applied floor and final coupon. Keep supporting records with the payment statement. If a reported rate changes under an administrator's revision policy, document how the agreement and servicer handled the revision rather than silently overwrite the original payment calculation. This gives later reviewers a clear record of the amount that was actually due.

Match the hedge's benchmark and timing

Compare loan and hedge rate names, fixing calendars, resets, day counts and notional. Even if both reference SOFR, differing measures or observation periods can leave cash-flow basis risk. Separate the loan bill from hedge receipts rather than subtract a generic hedge amount from interest.

The SEC-filed 2023 loan separately addresses cap requirements, counterparty support and benchmark matters.^[4] Its historical provisions are not universal terms; they show why the loan's hedge covenant and the actual hedge confirmation both need review.

Identify who receives hedge payments and when they reach the property's usable cash. A mathematical offset can arrive after a loan payment is due. Preserve liquidity for that timing difference and confirm whether the lender credits receipts in its coverage calculation.

Review missing-rate and benchmark-change provisions

The ARRC recommends workable temporary-unavailability and fallback provisions.^[2] Distinguish a missing published fixing from a permanent benchmark replacement, and identify who makes decisions and which adjustments apply under the contract. Include notice and confirmation procedures in the reporting calendar.

The completed convention record should identify rate source, rate date, reset, floor, spread, accrual, payment calendar and hedge comparison. Pair it with one independently reproduced payment and a forward cash schedule. That makes the floating-rate obligation understandable and auditable before ownership selects a hedge or commits to the resulting debt burden.